This entry was written by Tom Cleveland of forextraders.com and submitted to our guest post section. The author’s views below are entirely his or her own and may not reflect the views of manageME7.
Warren Buffett once wrote, “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” Wise advice from one of the world’s richest men, but even Mr. Buffett was a novice at one point in his career. Somewhere along the line he learned that knowledge, experience and control of one’s emotions are key traits that every successful investor must have.
Awareness through education of proper money management is a good first step in your preparation process. As an introduction, here is a “”Top Ten” list of investor mistakes and how to avoid them:
1.No Education: Believe it or not, a high percentage of beginning investors are so eager to play the market that they forgo any organized investment training or education exercise. Even gamblers know they need an edge to beat the “House”. The market can be very unkind in dealing with the ignorant. Invest the time to learn about investing long before you invest one dollar;
2.No Plan: Any training course would require you to write down your goals and objectives on Day One. What is your risk tolerance? Are you a long-term investor or a trader? How do you plan to allocate your investment funds? Are you prepared for an emergency? All valid questions that need answers to form your personal plan. As Coach John Wooden said, “A failure to plan is a plan for failure”;
3.No Experience: You must approach any market with a disciplined approach, one free of emotion that sets targets for both gains and losses, and then acts upon that “sound intellectual framework”. You must practice your craft to develop your approach and confidence. Practice with “virtual” accounts and keep accurate records. Analyze your errors in judgment and learn from them;
4.No Broker Review: Your broker is your business partner. In today’s Internet world, we too easily choose partners without ever seeing them or checking them out. Unscrupulous forex brokers have disappeared with enormous sums of money in that profession. As a result, there are numerous sites that actively review brokers. Do your due diligence before choosing your broker;
5.No Appreciation for Fraud: The criminal element in our society is very well organized and naturally gravitates to any activity involving money. Beware of unsolicited offers that promise unrealistic profit opportunities. Be skeptical of investment proposals that are not in writing or involve very complex securities, regardless of how professional they appear. If an offer sounds too good to be true, it usually is. If pressured to invest, walk the other way;
6.No Appreciation for Risk: Investing involves risk. Penny stocks are not bargains. They are some of the riskiest investments in your universe of choices. If you decide to invest in companies, read their annual reports. See if their price chart history resembles the charts for other successful companies. Know how much risk you are considering before you even buy the stock;
7.Insufficient Diversification: Mutual funds have rules that limit investment in any one company to 5% of the entire portfolio. The reason for such a rule is obvious. The negative results for one holding will not adversely impact the fund in a material way. If investing in 20 companies is too much of a burden, then consider the benefits of Exchange Traded Funds (ETF’s) or no-load mutual funds.
8.No Appreciation for Fees: Brokers are in business to make money. Be sure you understand their fee schedules. Mutual funds and insurance companies hide many of their fees in the small print. Be sure to read your contracts. There is no reason to pay exorbitant fees. If you are, then you have less to invest;
9.Influenced by Tips: Never react to tips from friends, the media or unsolicited salesmen. If you heard a great idea from a talking head on a financial channel, you can be sure that everyone else has already acted and driven the price up where no one should buy. It may even be a “pump-and-dump” scheme designed to fleece the unsuspecting, so beware. There is no shortcut to doing your own homework. Study before you buy;
10.Too Much Emotional Involvement: We end with Mr. Buffett’s advice. You cannot be married emotionally to a stock, especially a loser. Cut your losses early, and let your winners run! Always make decisions according to your disciplined approach honed during your early practice sessions. Remove emotion from the process.
It is now time to continue with your preparation work. If you end up losing sleep over your investments, then it may be a sign that you have bitten off too much risk. Be flexible, and adjust accordingly. Remember that all investment plans begin with budget planning first, then finding the best place to invest your money. Although your goal is to make money, you should also expect to sleep well and have fun, too!
Bi line: Tom Cleveland is a market analyst for Forex Traders, an online resource for the foreign exchange market and forex news.